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Without increases in world supply the market will need to figure out how to reduce demand to avoid shortages.

Bill Biedermann, Hedging strategist

August 13, 2021

5 Min Read
market stock collage with bull, bear, calculator and charts.
Getty Images/gopixa

Markets ended the week strong based on production and Supply-Demand updates that shocked traders. UDSA’s production report reduced supplies in the U.S. to levels well below trade expectation, with a 5- bushel per acre reduction in corn yield resulting in 415 million bu. decline in supply and a 0.8 bushel per acre yield loss in beans resulting in a 66 million bu. decline.

We believe USDA reduced yields appropriately. One could argue they may have even reduced it too much for this time of year.

USDA also updated Supply-Demand tables. With ending stocks already tight, the only way USDA would be able to maintain ending stocks above pipeline requirements and keep trains and barges working, it had to mathematically reduce demand --- and this is where the problem is.

It’s about demand

On a world balance sheet, normally a decline in U.S. production would shift export demand to another world supplier like Brazil or Ukraine. But with the recent drought and freeze damage seen in Brazil, USDA was forced to reduce the Brazilian corn crop more in line with industry numbers at 87 mmt versus the previous 94 mmt estimate. This took another approximately 230 mil bu. from supply.

Combining these adjustments, total exporting supplies declined by over 10 mmt or over 400 million bu. USDA was able to bury much of this problem by spreading the supply decline between 2021 and 2022 crop years since the U.S. and Brazil are on a different crop calendar. But until 2022 crop supplies are available, the 10 mmt adjustment is the available supply.  

Now we have a problem.

USDA’s numbers assume the industry is going to slow demand. But demand for corn is not going to slow just because USDA said so. In order to reduced demand, we either need an incentive to shift corn usage to a substitutable commodity, or cut the source of demand like reducing animal numbers, or shutting down ethanol plants.

To provide an incentive for that, it will take a much higher price. How high? We’re all wondering.

Remember Toilet Paper?

Social behavior changes as fundamentals change. When demand knows there is adequate supply, purchasing behavior is orderly. But as we learned from Covid, when you tell someone there is going to be a shortage, demand hordes, which means end users buy inventory out ahead of usage and are willing to pay much more.

Once they own it, they use it regardless of price increases, leaving those who did not buy desperate to get it bought. We saw that happen with toilet paper last year. Even when gas prices were at $4.50 per gallon people still bought gas to get to work.

This is called the ELASTICITY of a market. Elasticity changes as fundamentals change. Further, the elasticity of a commodity that we need in order to function (like food and fuel) has a much different elasticity than that of shoes. We must have food and fuel in order to keep our teenagers happy right? That is why when the fed’s report inflation, they exclude food and fuel prices from the core inflation rate. They figure you have to have it, so price is not relevant. But it is very relevant to my check book.

It looks like USDA has worked the math to reflect there will not be a shortage and pipeline supplies will be adequate. But reality is, there will have to be a cut in demand in order to achieve that. The more the market begins to see and realize we need to reduce demand, the more aggressive and inelastic demand will become. The more inelastic, the greater the price move will be required to get that last feedlot to ship those cattle instead of feed, or that ethanol plant to stop grinding.

For the short term, traders will focus on the filling weather, crop tours, independent yield checks, and harvest data as it starts to roll in. But ultimately, if USDA is not able to raise the world supply on upcoming reports, the market will need to figure out how to reduce demand to the levels USDA suggests we need in order to avoid a shortage.

That is the game changer end users are up against.

Reach Bill Biedermann at 815-893-7443 or [email protected]


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About the Author(s)

Bill Biedermann

Hedging strategist, AgMarket.Net

Bill is a well-known speaker, presenter and commodities advisor. In addition to trading commodities for 40 years he has testified before Congressional hearings, CFTC hearings, served for the U.S. State Department AID and co-founded one of the largest IB Brokerage and Agricultural Economic Research firms in the U.S. Bill graduated from Illinois State University with majors in Agricultural Production, Ag Economics and Ag Education and farmed from 1973-1988.

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